What is a Cryptocurrency Wallet and How Do We Use It
What is a Cryptocurrency Wallet?
A cryptocurrency wallet is used to send and receive digital assets (cryptocurrencies such as Bitcoin) and check your balance. These wallets are essentially encrypted programs that store private and public keys and can connect to different blockchain which allows the user to make transactions. The keys come in two varieties, one public and one private. The public key is the point of contact for others to send you bitcoins, equivalent to a bank account number while the private key is used to approve of bitcoin transmissions. To use any cryptocurrency, a digital wallet is needed and most cryptocurrency exchanges offer an easy to set up one as a feature.
Cryptocurrency wallets allow you store and access your cryptocurrency coins and will generally come with additional features. These various wallet programs come in three different uniquely different categories. There are software, hardware, and paper wallets that offer different accessibility and levels of security.
The different types of wallets offer different degrees of security. Any wallet that stores data online has an intrinsically higher risk attached to it. Wallets online offer vulnerability to hackers attempting to access your funds. Wallets that store data offline are not open to be exploited by hackers due to the nature that information does not rely on online third parties to provide security.
There are programs called Desktop wallets which are installed on a full operating system such as a PC or a Mac. The point of access to the wallet is through that individual computer or laptop on which the wallet was installed. Desktop wallets provide a high level of protection but can still be vulnerable to malicious software and outside attempts to access the PC by cybercriminals.
Mobile wallets are apps that are installed on a smartphone and are useful due to their portability and the fact that they are part of most users everyday carry. Mobile wallets are generally smaller than their desktop counterparts do to the phone’s capacity for storage.
Hardware wallets utilize software stored on a hardware device such as a USB. While hardware wallets create transactions online, they have an extra level of security the transaction is stored offline (cold storage). Many hardware wallets can access multiple web interfaces and can utilize different coins. To make use of the device, it needs to be plugged into an online device, enter the users pin, make the transaction and confirm the process. This allows the user to make standard transactions while keeping their money offline in the most secure fashion.
Online wallets exist on the cloud (an online network of computers) and can be utilized through any device with access to the internet. This ease of access allows the storage of private keys, but at the cost of security because your keys are managed by a third party. This delegation of authority gives new ports of entry for hackers to exploit, however many companies continue to enhance their security from such intrusions. Anytime there are multiple controls, hackers have multiple entry points to information, and this should be given extra attention to weigh the risk of ease over security.
Paper wallets currently provide the highest level of security. Paper wallets are essentially just a physical copy of the users public and private keys. To use a paper wallet, the user will make a transaction on their software wallet to the public address on the paper wallet. Users can also withdraw or spend coins by transferring from the paper wallet to a software wallet. This transaction referred to as ‘sweeping’, can be inputted manually or scanned off a printed QR code. While this is the most secure method there is the inconvenience of multiple steps involved and the risk of losing the key.
You should back up your wallet. Leaving only a limited amount of funds for online transaction, you’ll add an extra level of security if you keep the majority of funds offline. Cold storage (offline) options to keep reserve cryptocurrency such as a paper wallet, a USB, or the Ledger Nano will allow you to recover a lost or stolen wallet and potential computer failure. However, it is not 100% secure from hackers.
Despite online wallets being the most accessible to exploit for a digital attack, caution should be implemented when utilizing an digital wallet. At any time, if your private keys are accessed by a third party or become public, then you will lose all the funds in the wallet. Lost funds cannot be retrieved and the transactions cannot be reversed. Also, use your wallet with caution.
Keep your software updated so as to maintain the latest security features. Makes sure to keep any access to your wallet updated, including your computer and mobile.
Also add and extra security available. The harder it is to access your wallet the more likely that a hacker will attempt to find an easier target. Maintain long, complex and unique passwords, as well as require password identification for any withdrawal attempt. Use reputable wallets that offer two-factor authentication and add an extra level of security by requiring a pin to open the wallet application. An extra level of security on top of the aforementioned ones, would be a wallet that offers multi-signature (multisig) transactions. A multisig wallet needs the authorization from multiple users before a transaction will be processed.
Many people now have a digital wallet, however there is still a lot to be learned about them. The way they work is still not fully understood by many users. Cryptocurrency wallets in fact do not store currency. Currencies don’t get put away in any single area or exist anyplace in any physical shape. What exists is a decentralized ledger of transactions on the blockchain.
A cryptocurrency wallet is used to send and receive cryptocurrencies and check your balance, through public and private keys. When you receive a transfer in a digital asset, the sender is signing off ownership of the asset to your wallet’s address. Your wallet then matches your private keys to the public address. When there is a match the balance between sender and receiver adjust accordingly, however no real physical exchange has occurred. What is recorded is the transaction on the blockchain and the adjustment to the wallets balance.
There are currently hundreds of altcoins (any cryptocurrency that isn’t Bitcoin) and each coin has a unique ecosystem and infrastructure. Depending on your level of comfort in trading or using cryptocurrencies you may have to do some extra research into the right wallet for you. There are some wallets that have limited access to the number of coins available to it, while there are wallets that continue to add accessibility to multiple currencies on a single wallet.
Which wallet you choose will depend on how you plan on using it. Are you looking to make everyday transactions or are you planning to trade and make investments on the cryptocurrency market? Are you looking at one specific coin our do you plan to diversify? Will you be making transactions on the move, or will you only use it from home? Now there are a multitude of wallets to choose from, and as the industry grows, new varieties which more and more features are becoming available.
A popular wallet is Blockchain.info. It’s a web-based wallet that can be accessed through any browser. This wallet can be enabled for two-factor authentication on the browser, and a pin code can be enabled on smartphones. This is a hot wallet (connect to the internet) and transactions get processed via the Blockchain.info’s servers, the company does not have access to your private keys. Overall this wallet is easy to use, has a decent level of security, well-known and free.
A creation of Bitpay, Copay is a convenient multi platform digital wallet. Copay can be accessed through a desktop, mobile device, or online, and among its features is that it is a multisig wallet. The multi-signature feature allows multiple partners to share funds. This wallet is easy to get into but still has all the bells and whistles for veterans.
Mycelium is an advanced digital wallet for advanced users. The mobile wallet is found on the App Store and Google Play. iPhone and Android users can make transactions of bitcoins under their complete control. This is a wallet with many features, however it is lacking in its platform support, being found only on mobile.
Jaxx is a robust multi-currency wallet with support for multiple digital assets. Jaxx can be found on a plethora of platforms and devices (Windows, Linux, Chrome, Firefox, OSX, Android mobile & tablet, iOS mobile & tablet). Jaxx also has Shapeshift a unique feature that allows the user to make in-wallet conversions. Jaxx is continually being upgraded to accept new currencies.
Trezor is a hardware wallet designed to store large sums if bitcoins. Being a hardware wallet, Trezor is immune to malware and maintains the privacy of your private keys, making this a secure wallet. Trezor takes feedback from the community because it is open source and can be trimmed to what users actually want. The device is usable with the main operating systems, however in order to make any transaction on the $99 device, it needs to be with you. If you’re an investor that wants to save a lot of bitcoins and then store it, this cold storage device might be the way to go.
Ledger Wallet Nano is a small USB hardware wallet based on a smart card. It uses the multisig feature as well applying different layers of security to protect it from attack vectors. This unit is fairly inexpensive coming in at $65 and offers multi-currency support.
While this is just a small list of wallets, there are many more to explore. If you are trading cryptocurrency, you’ll need to sign up with a cryptocurrency exchange (similar to trading on a foreign exchange (FX) platform. Most exchanges are beginning to offer their own wallets, that will streamline trading for users.
There are transaction fees associated with cryptocurrencies which are generally a fraction of standard banking fees. Processing fees will sometimes need to be paid for specific types of transactions to network miners, while other transactions are free of fees. A general benchmark for a fee would be to use the median transaction size and the associated fee around $0.12 calculated as a fractional amount of satoshi’s. You can also set your threshold for fees, but keep in mind that if you set it too low, your transaction may not be given priority, or even need to wait hours to get confirmed. If you need a prompt transaction, you may need to adjust to a higher fee. No matter which wallet you choose, transaction fees will generally be extremely low or non-existent.
Digital wallets are pseudonymous and directly linked to your identity. All of your transactions will be recorded permanently on the blockchain, however, it will not contain personal information. There still are ways to trace back to you through your wallets address. Currently there are many initiatives underway to increase anonymity and privacy, such as using stealth addresses and coin mixing.
The type of wallet a user choses will depend on their level of comfort with security and the purpose that they aim to use their cryptocurrency. In the end, the cryptocurrency market is not going to vanish and it’s better to know the options available.